Examination of Witnesses (Question Numbers
200-219)
MR MIKE
O'BRIEN MP, MR
SIMON TOOLE
AND MR
JIM CAMPBELL
25 MARCH 2009
Q200 Mr Weir: UK Oil and Gas predict
that the number of wells drilled for exploration and appraisal
will drop from 109 in 2008 to just ten in 2010. Do you consider
that to be a crisis in investment?
Mr O'Brien: As far as the numbers
of wells are concerned, the issue is the quality of those explorations.
You cannot just work it on the numbers like that; that is not
a good way of looking at it. What we are aware of is that there
has been a slowdown in the extent to which companies are starting
to exploit their licences. You are talking about offshore here,
are you?
Q201 Mr Weir: Yes.
Mr O'Brien: And the way in which
the various licensing rounds have gone. I have just delayed the
next licensing round until the start of next year with the agreement
of the industry. There was a lot of interest last November, the
maximum amount of interest, far more than we had anticipated in
the twenty-fifth round. I have delayed the twenty-sixth round
to give some opportunity for the licences that we have already
dealt with to be absorbed in the industry. I have also indicated
that, as far as the twenty-fourth round is concerned, I am prepared
to relax some of the licensing conditions on application and to
try to ensure that we have companies who plan to do work but who
are perhaps delaying it for a while because of maybe finding some
issues around finance or who just want to look at their liquidity
for a while. They will continue to hold the licences providing
we are satisfied that they are companies that will exploit and
do intend to exploit it. We have still got a series of initiatives,
as I am sure you are aware, such as the Fallow Field initiative,
whereby we say "Use it or lose it". You get three years
and you lose it if you do not use it unless you can show a good
reason. That has worked quite well. We also give particular tailored
licences to companies so that if they have got a particular problem,
let us say they are going into an area that has not been explored
before, we will give them a longer time to do the work needed
to analyse the infrastructure, the strata, the geology. We have
taken a number of initiatives to try to ensure that people get
the sorts of licences that enable them to carry out the work they
want. I do not think we are facing a crisis. I do think that we
need to watch this with care because it is unquestionably the
case that at this stage of development of the UKCS, particularly
with the economic situation, problems can and are likely to arise.
So this situation needs careful monitoring.
Q202 Mr Weir: Obviously one of the
concerns about any downturn is the effect on jobs within the industry
and indeed retaining skills within the North Sea. Is there anything
the Government can do about this to ensure that jobs are retained
and particularly skills are retained in the North Sea area?
Mr O'Brien: You are right that
jobs are enormously important. It is 350,000 jobs in the oil and
gas industry in the UK, it is very important, plus a further 100,000
jobs in UK companies that work abroad. In total in the oil and
gas industry that is 450,000 jobs. That is a lot of employment.
There have been concerns about the nature of the skills in the
industry. I have looked at this. We have been told there is an
aging workforce and so on. Certainly offshore on some of the rigs
there are issues around that, but by and large the average age
is about 41. If you consider that we are looking at people by
and large between 20 and 60, 41 is not a bad average age to have
in an industry. I do not think there is a crisis in terms of skills.
OPITO, the very good oil industry-based finance training system,
which is currently training about 350 young people, not all of
them that young, is really a very good skills academy for the
industry. So they are carrying out training. They are quite good
at it. The issue is whether a downturn will start to reduce the
number of jobs. We have got two things happening. One, we have
got the economic downturn and at the moment there is not a substantial
problem there. We were worried about Oilexco but, as I have already
said, Premier have come in and bought that now. There is also
the fact that we have got a depleting level of reserves and inevitably
that is going to have a long-term impact on the number of jobs.
Q203 Mr Weir: SCDI and Scottish Enterprise
did a report recently which showed the supply chain was worth
some £14 billion to the Scottish economy. Obviously we need
to make sure that that remains robust if there is a downturn in
the North Sea. That ties in with what you mentioned before about
having a base for companies to use these jobs in other areas.
That report only goes up to the end of 2007. It has not taken
into account the current recession. Have you any indications of
the effect that the current economic situation is having on that
supply chain? Is there anything Government can do to ensure that
it gets through it?
Mr O'Brien: There are some indications
that there are problems in the supply chain but they are variable.
They are mostly where we are looking for investment and it is
a bit slower coming than we had hoped. I think I would have to
say that there are potential problems brewing there but at the
moment they are not massive. What I am more concerned about in
the longer term is that the Scottish oil and gas industry recognises
and adapts, recognises that it can service, as some of it does
now, globally the oil and gas industry, and that it provides rigs
and equipment and kit that has a global market, not just a UKCS
market. So they have to be helped to ensure that they develop
that international market as the supply to the North Sea and west
of Shetland in due course over a longer period starts to reduce.
We are dealing here with an industry which is very self-aware,
well-organised and capable of helping itself through difficult
times and also is used to dealing with depleting energy sources,
so it goes to various parts of the world, exploits it and moves
on. We find that they are reasonable to work with.
Mr Campbell: You mentioned targets
previously. One of the pilot targets was for a certain amount
of exports and that was exceeded two or three years ago in that
the UK industry was exporting several billion pounds-worth of
kit. A good share of the £14 billion you mentioned now comes
from the world market. If we compare what has happened this time
with the last time that UKCS went through quite a deep reduction
in activity in 1999 in the oil and gas industry, the oil and gas
companies in the supply chain chopped jobs very radically in a
short period of time. We have not seen that this time round which
I think is a very positive sign. That is not to say they are at
all complacent about what is happening, but it is a different
approach that is being adopted by the industry this time—dare
I say, a much more mature approach this time. As the Minister
says, we will have to wait and see what happens in the future.
Q204 Sir Robert Smith: I want to
reinforce that sense of jobs dispelling in my constituency in
the north-east of Scotland. You can see how important the industry
is, it has been through previous downturns, and how depressing
it is to see the rows of For Sale signs going up across the north-east
if it is not handled right. You have said the crucial thing is
to sustain investment. You recognise the importance of the hubs.
Given that this downturn is in a mature phase of the industry,
it is even more important to get that right. The Treasury has
honed in on this value allowance to assist the industry. How do
you see the value allowance working? Have you had any thoughts
about at what sort of rate it should be set to be effective?
Mr O'Brien: Issues around this
will be best dealt with by the Chancellor in due course. It is
a perfectly legitimate question, Robert. I think our engagement
with the Chancellor on these issues needs to be one that happens
within government.
Q205 Sir Robert Smith: That goes
back to the targets and the failure maybe to meet the pilot target.
There was great engagement between government and industry but
the Treasury were not necessarily in the loop. Perhaps one of
the reasons we did not reach our targets was that the Treasury
started to see a short-term cash cow in the North Sea rather than
a long-term investment.
Mr O'Brien: There were changes
in the tax regime in 2005. The Treasury does not envisage during
the course of this Parliament making a substantial increase in
the tax rate and the regime is in place, but we have agreed to
look at a certain number of adjustments that have been asked to
be made by the industry and the Chancellor in due course will
no doubt take a view on them.
Q206 Sir Robert Smith: That dialogue
was taking place in the maturity of the province and the Government's
wish to see security supply maintained in maximising the North
Sea in that climate. Since then it has snowballed with the economic
crisis. Is there a dialogue that you are part of to encourage
the understanding that maybe on the cashflow side there is a thought
that the early release of tax credits for exploration to those
companies that have not got any profits yet to put them against,
so that they could assist their cashflow by the early release
of tax credits, and also that recognition that the current value
allowance was looking at incentivizing new fields west of Shetland,
high temperature, high pressure? Is there not an argument now
that any incremental development on the hubs themselves will also
need to be incentivized to make sure the investment is there so
they are not decommissioned?
Mr O'Brien: There are various
ways of incentivizing. As far as the tax regime is concerned,
no minister outside of a Treasury minister will discuss it, as
you know, and beyond saying what I have said, I do not propose
to do so here. However, there are ways in which through non-tax
means we can look at the issues around the best exploitation of
hubs and the creation of hubs and also making sure that the industry
continues to benefit. We are working through pilots to ensure
that we develop those methods of helping them and providing the
infrastructure that they need and the advice and guidance that
they need. In terms of what the Chancellor is going to do, we
will have to wait for the Budget!
Q207 Sir Robert Smith: The one key
thing you could do then is, if you cannot tell us anything, make
sure that the Chancellor hears the evidence we have heard about
how crucial these issues are to the North Sea.
Mr O'Brien: I can certainly pass
on that evidence to the Chancellor. Not only that, I can reassure
you that the industry has talked to us, as you would expect, at
some length and with very precise wishes and those have been passed
on to the Treasury and they are aware of them, as they are about
the demands and wishes that are coming from all sectors of the
economy.
Chairman: Another aspect which is crucial
to development is the regulatory regime.
Q208 Dr Whitehead: Do you think the
DECC Energy Unit is adequately resourced?
Mr O'Brien: By and large, yes.
What we are doing at the moment is we are looking at the resource
available and we are determining as a new department where that
can be best deployed. Have we overall got the right numbers? By
and large, yes. Have we got to adjust the deployment of where
we best want the staff that we have got? We want to look at that
and make sure that we are content. We have come from two different
departments. We are anxious to ensure in the new department we
do not continue the divisions that previously existed between
officials in those two departments and so we are trying to integrate
the structures of DECC so that we prioritise the staff where we
feel as DECC we most need them. If you are asking if we are just
going to perpetuate the number of officials that previously operated
in BERR in the same roles, no, because we need to redeploy.
Dr Whitehead: Is there congruence between
the money that is raised from licence fees and the money that
is allocated to the work of the Energy Unit, or does some of that
money disappear elsewhere?
Q209 Chairman: It is £60 million
comes in from that.
Mr O'Brien: I do not think the
answer is that there is congruence. We get quite a lot of help
from the industry.
Mr Toole: The £60 million
of licence fees goes into the consolidated fund.
Mr O'Brien: So it then comes back
out but not as we know it!
Q210 Dr Whitehead: We could not say
it was hypothecated?
Mr O'Brien: No. I was a bit surprised
because I had never heard anyone suggest that. As you have just
heard from Simon, it goes into the consolidated fund, so it does
not have any direct effect on the number of staff we have.
Q211 Dr Whitehead: For example, the
Unit might be employed in producing a reliable registry of offshore
production licensing holdings, which certainly the industry suggests
could be a very good way of making sure that a number of costs
and development issues are sorted out, including the title, et
cetera. It may be the case that it is simply not within the capacity
of the Energy Unit to produce such a thing.
Mr O'Brien: I think it is within
the capacity of the industry, if it wants such a registry, to
create one and ensure, of course, that it has insurance policies,
as the Land Registry does, to cover any errors and ensure that
it has got all the administrative capacity. We have got a record
of where we have issued licences. As to creating the sort of facility
that the industry says would be beneficial to it, I am sure it
would. I am very happy to work with the industry if they want
to fund the creation of it. What they are saying at the moment
is, "Government, will you please go and create this for us
just like you did the Land Registry?" to which my reply is,
"Yes, and the Land Registry costs an awful lot of money to
run". It was created in 1925. I do not think we are in the
position where we want to create a new registry. If the industry
is prepared to finance it then we are prepared to work with them
in creating it. We would also want to ensure that if there were
errors, as the Land Registry has to cover itself with insurance,
so too that registry would have to do so given that an error in
that registry could well have very, very costly implications for
somebody who relied on it.
Mr Toole: We do keep our own record
of who we have given licences to and we are working hard to make
sure that the industry can see that and tell us of any errors
that are in it. So we are working with them, but as the Minister
says, the liabilities that the Land Registry takes on are very
high and very costly and the Minister does not want to accept
those.
Q212 Dr Whitehead: As far as the
regulatory impact on the offshore sector is concerned, how do
you think the emergence of Phase III of EUETS is going to impact
on particularly the offshore sector's role in auctioning and the
extent to which it could be argued that auctioning may simply
drive investment elsewhere?
Mr O'Brien: There is a lot of
concern, as you would expect, in the industry, as there is across
other industries, about the introduction of ETS. There have been
various predictions about big problems, some of which we think
are just wrong and some of which we think may have some merit.
Q213 Dr Whitehead: Which ones do
you think are wrong?
Mr O'Brien: One example would
be that the oil and gas industry says that the carbon price would
be around €45. The predicted carbon price for 2013 at the
moment is about €20. We would work on an assumption for our
predictions that it would be round about €30 at some point
during Phase III of the ETS. We are just concerned that some of
the doom and gloom messages that have come out from some parts
of the industry are based upon statistics that they need to look
at very carefully. For example, they have also said that for the
small companies this will be very, very damaging. Well, I think
they have got to show how. For some companies it will have an
implication. It is clear that if they are generating then they
are going to be paying for the EUAs, the allowances. If they are
not generating then there is an issue about whether, with carbon
leakage being one of the key factors round the oil industry and
we have still got quite a way to work through in terms of the
extent to which particular rigs and the oil industry will be able
to show that it has got an element of carbon leakage, that enables
them to look for non-generation free allowances. In terms of where
it is generating electricity or energy or flaring, then it is
clear that they are going to be covered by this and not only covered
by the ETS as it currently is, but it depends to some extent what
happens out of Copenhagen and where the cap is on the ETS further
down the line. There are a lot of issues around this that we are
working through with the industry. I am concerned that there are
fear levels about dealing with global warming within the industry
that are greater than they need to be. I have no doubt there will
be an impact. The question is the extent of that impact and I
think that needs to be determined. The industry is very concerned
at the moment and we are trying to work through those concerns
with them. One of the difficulties is that the various rigs generate
electricity at different levels. Some of them use their turbines
to mechanically work the engineering on the rig. Okay, that is
not generating electricity as such and therefore they may qualify
for free allowances in relation to that and some of them are generating
up to 90% of their effort through generating electricity and that
is what is doing a lot of work on the rig and they may end up
having to buy carbon allowances for that. There is a distinction
between the generating side and the non-generating side which
is important to identify. The industry is concerned about both
sides, but it is probably more concerned about the generating
side than about the non-generating side.
Q214 Dr Whitehead: Bearing in mind
you have said that the oil and gas industry is now very much an
integrated global concern, do you think that the charge that actually,
however effective and benign those regulations may be, the effect
of driving exploration and investment into regimes where there
is perhaps not that regulation could be a real issue?
Mr O'Brien: Let me be very cautious
in the way I answer you because we are obviously having discussions
with the Commission about the issues around carbon leakage. Let
me say that there is a criterion around the Directive which defines
the sectors at risk as those with a trade intensity of around
10%, so there is a likelihood that they will just go off. At that
point questions then need to be asked about whether they are likely
to be part of a big problem of carbon leakage. The industry argues
that there is a big problem of carbon leakage. We are investigating
the detail of this to see the extent to which we will need to
make representations around carbon leakage to the Commission and
indeed take a view ourselves about the level of carbon leakage
that is likely to occur. There is much more work to be done before
I can give you a definitive answer to that. We want to work through
with the industry their arguments as to how, both in terms of
generation and no generation, they will be able to demonstrate
that they are potential victims of carbon leakage and whether
individual companies, whether big ones or small ones, can justify
us taking a view with regard to allowances or justify the Commission,
whether we do or not, taking a view with regard to allowances
in the ETS.
Q215 Dr Turner: How does your Department
ensure that companies who claim they will follow environmental
best practice actually do so once they have got consent for projects?
Mr O'Brien: We have a number of
means by which we ensure that we cover the work of these. They
are subject to licensing conditions as to how they can carry out
their work and we have got control over the terms on which licences
are issued. They will normally ensure that they not only comply
with those but that they are able to show that they will decommission,
because that is where we get many of the problems around environmental
issues. We have 40 environmental statements, six appropriate assessments
under the Habitats Directive and 40 screening and scoping documents
currently reviewed, around 3,000 permits issued around chemical
use and oil discharge permits, drilling approvals and permits
under the EU Integrated Pollution and Control and Emissions Trading
Directives. We investigated and examined problems around 386 oil
spill plans, so they plan what they do when there is an oil spill
and we have to approve their plans. We conduct inspections and
investigations of the various projects both onshore and offshore.
There were 55 inspections done last year to check whether the
various kit is performing at the standard that environmentally
is adequate. We report cases where there have been breaches to
the Procurator Fiscal in Scotland. Since 1998 we have reported
11 incidents to the Procurator Fiscal resulting in nine prosecutions.
There are issues around spillage. Let me give you some figures.
There are about 366 million tonnes of oil which has been produced
between 2002 and 2005. During the same period 362 tonnes of oil
was spilt. This equates to 0.00009%. That is a pretty good record.
Q216 Dr Turner: Small percentages
of a very big amount can be significant.
Mr O'Brien: Yes, 362 tonnes is
significant but not given the sheer amount. It does suggest they
are doing fairly well.
Q217 Dr Turner: Having said that,
the strategy consultees such as the Joint Nature Conservation
Council have identified some issues. They tell us that there is
"scope for improvement" in operators' compliance with
the Environmental Impact Assessment process and that you should
consider reviewing the current system. Will you do that?
Mr O'Brien: The compliance level
we have just discussed in terms of the level of spillage and so
on. There are issues that concern me about west of Shetland and
how we would deal with those some quite sensitive environmental
areas. There are some areas like St Kilda and so on where there
are particular issues around the environment that we need to address,
questions about whether there should be no-go areas. I think around
that there are issues which we do need to examine and take a view
on. Because this is a continuing process of trying to ensure that
we have an industry which not only carries out its work of exploitation
but also decommissions properly we have just got to ensure that
all of this is done in a way in which we keep it under constant
review. Am I planning a review beyond the areas that I have already
identified? Not a substantial one. Am I conscious that we need
to keep watching this all the time? Yes, I am.
Q218 Dr Turner: Your comments about
west of Shetland chime very much with the concerns of the RSPB
who tell us they feel there is a need for a better, up-to-date
survey of seabirds and other wildlife in areas affected by exploration.
The knowledge base is not what it might be in terms of that area
of marine ecology. Will you be doing anything to support such
surveys?
Mr O'Brien: We do look at things
when we get applications for particular areas to see what the
impact will be. What I think the RSPB want, if I understand their
demand correctly, is a general survey. We are looking at all the
areas so that we then have a view about what the impact would
be across the whole of the potential oil and gas fields. Our view
is that we are content to look at the environmental impact on
birdlife and crustacea, et cetera, when we have an application.
These things are not fixed. You could not just do a survey and
say, "Okay, we've done the survey," because migratory
patterns and all sorts of things do change over time. The result
is that you have to keep the thing constantly rolling. If you
had infinite resources you would like to do all sorts of things,
but I think the better way of dealing with it with the resources
that are available is to carry out clear impact assessments where
we have applications to carry out work that is likely to be done.
Q219 Dr Turner: This comes back to
a question we have considered before, which is whether you should
be doing project-by-project environmental assessments or whether
you should have a strategic assessment of a larger area so that
you build whole patterns.
Mr O'Brien: We do undertake larger
strategic environmental assessments of larger areas, but when
you have got a particular project which comes forward it will
have a defined impact in a particular area and you need to look
in much more detail at what that impact is.
Mr Campbell: It is fair to say
that the Department is the single largest funder of bird surveys
in the country and since 2005 has spent £3 million on bird
surveys, so it is a very significant amount of money. Prior to
that we have undertaken over the last seven or eight years strategic
environmental surveys which were, when they started off in 1999,
world leaders in determining the environmental scene that we have
found round about the UK. I think it is fair to say that we are
in quite a good position with regard to knowledge of not just
the benthic colonies but also of birds around the UK. Whilst it
is understandable RSPB would quite like a bigger survey and they
have estimated something like £10 million, we believe if
you were to do that across the whole of the UK it would cost considerably
more and somebody has got to pay for it ultimately. We think we
are in a good position as regards our environmental record and
the information we have around our waters.
Chairman: There is one very important
issue which came up in our discussions in Aberdeen in relation
to transferable skills and resources and such things as the potential
of carbon capture and storage using the infrastructure of the
oil and gas industry.
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